FDCPA Doesn’t Apply To Defaulted Debt Buyer- SCOTUS

With its rhythmic, alliterative opening line (“disruptive dinnertime calls, downright deceipt…”), Judge Gorsuch’s debut Supreme Court opinion in Henson v. Santander Consumer USA, Inc., 582 U.S. ___ (2017), tackles the decidedly unsexy Fair Debt Collection Act (FDCPA or the Act) – scourge of the creditor and cash cow to enterprising plaintiffs who love the strict liability Act for its penalties and attorneys’ fees provisions.

The plaintiffs sued the defendant, who purchased an auto finance company’s debt, in a Maryland federal court complaining of strong-armed collection tactics that violate the FDCPA. The district court dismissed the plaintiffs’ claims on defendants’ 12(b)(6) motion finding the defendant wasn’t a debt collector under the Act and the Fourth Circuit Appeals Court affirmed.

The case question: Is a company that buys defaulted debt from another more like a debt collector under the FDCPA (in which case the Act applies) or a debt originator (in which it doesn’t)?

The Answer: the latter. The debt buyer trying to collect on its own behalf is not a debt collector under the Act.


The FDCPA allows private lawsuits, statutory penalties and attorneys’ fees against wayward debt collectors.

A debt collector under the Act is anyone who “regularly collects or attempts to collect…debts owed or due…another.” 15 U.S.C. s. 1692a(6).

The Court started its analysis by offering as the archetypal debt collector – the repo man. Everyone agrees the repo man’s business is collecting another’s debts. For the repo man’s polar opposite, the Court pointed to a loan originator as clearly not a debt collector. The defendant fell somewhere in the middle. The question was whether it more like a repo man or a debt originator.

The plaintiffs claimed that since FDCPA Section 1692 uses the past-tense “owed,” the Act applies to purchased debt. After all, according to plaintiffs, they owed a debt to the original auto finance company – clearly “another” entity. As a result, defendants were trying to collect a debt owed “another” – the finance company who sold plaintiffs’ debt.

For its part, the defendant asserted that because it only sought to collect its own debts, it wasn’t an FDCPA debt collector.

The Court agreed with the defendant and rejected plaintiff’s argument as textual hairsplitting. By its plain terms, the Act aims to protect consumers from abusive tactics of “third party collection agents working for a debt owner – not on a debt owner seeking to collect debts for itself.” (p. 3)

For support, the Court noted that various FDCPA sections distinguish between debt originators, debt owners and debt collectors. See ss. 1692a(4), 1692a(6). The Act also differentiates between “original” and “current” creditors. s. 1692g(a)(5). Yet the Act is silent on any differences between originators and current debt owners in its debt collector definition.

And while someone can’t simultaneously be a creditor and debt collector, the Act doesn’t prevent a debt buyer like defendant from being a creditor where it tries to collect that debt on its own account. (p. 8).

The Court also rejected plaintiffs’ policy argument – that applying the FDCPA to defendant would further the Act’s goal of debt collectors treating consumers well. Plaintiffs continued that had Congress realized how the debt buying business would mushroom, it would have treated defaulted debt buyers the same as independent debt collectors when drafting the Act. (p. 9).

The Court viewed this as “quite a lot of speculation” and left it up to Congress to modify the Act if and when it decides to treat debt buyers as debt collectors.

Take-aways: Debt buyers who try to collect on their own account are not debt collectors under the FDCPA.

It remains to be seen whether Congress expands the Act’s coverage to defaulted debt purchasers like the Henson defendant. Hopefully not.

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Fair Debt Collection Practices Act and the ‘Overshadowing’ Demand Letter – Part II of II

Part II – 5.5.14 12:14 p.m.

In Vincent v. Chuhak & Tecson 2014 WL 1612697 (N.D.Ill. 2014) the Court denied the Firm’s motion to dismiss the plaintiffs’ FDCPA claims because it was at least plausible that the Firm’s demand letter was confusing and contradictory to the “unsophisticated consumer.”  All that’s required for a plaintiff to survive a Rule 12(b)(6) motion is that a Complaint allege facts that plausibly state a valid claim. 

The Court first noted that Section 1692g of the Act requires a debt collector, within five days of initial communication with a consumer, to provide a written “validation notice.”  The validation notice must contain (1) a statement that unless the consumer disputes the validity of the debt within 30 days after receipt of the notice, the debt will be assumed valid; and (2) a statement notifying the consumer that if he disputes the debt in writing within that 30-day period, the debt collector will obtain verification of the debt and mail a copy of it to the consumer.  The FDCPA cautions that collection activities and communications must not “overshadow” or be “inconsistent” with the disclosure requirements of the validation notice. 15 U.S.C. § 1692g(b); Vincent, *1.

In determining whether a creditor’s demand letter satisfies the FDCPA’s validation strictures, the court applies the “unsophisticated consumer” standard.  Whether a demand letter is confusing under the unsophisticated consumer standard is a fact-based inquiry decided on a case-by-case basis.  But if it’s plain from a reading of the demand letter that a significant fraction of the population wouldn’t be misled, the demand letter complies with the FDCPA.

The Northern District held that the Firm’s demand letter was confusing because there was an “apparent” contradiction between (a) allowing the unit owner to contest the validity of the debt, and (b) simultaneously stating that if the unit owner didn’t pay within 30 days, his right to possession of the condo would end. Vincent, *2-3. 

What Should Have the Demand Letter Said?

The Firm’s demand letter would satisfy the FDCPA if it included “safe harbor” language that explained the letter’s apparent inconsistencies.  The model “safe harbor” language suggested by the Seventh Circuit (a so-called “Bartlett letter”) provides that (1) the creditor doesn’t have to wait until the end of the thirty-day period before suing to collect this debt; but (2) if the debtor requests proof of the debt or of the name and address of the original creditor within that thirty-day period, (3) the creditor must suspend its collection efforts, and stop any litigation based on the debt.  Vincent, *3; Bartlett v. Heibl, 128 F.3d 497 (7th Cir. 1997).

The Court also rejected the Firm’s argument that the letter complied with the FDCPA because the 30-day letter was required by the Illinois Forcible statute.  735 ILCS 5/9-104.1 (30-demand notice on delinquent unit owner  requirement).  The Court held that when sending a demand letter to a debtor, the Firm still has a duty under the FDCPA to explain how the debt collector’s rights fit with the consumer’s.  And since the Firm failed to do this (reconcile the creditor’s and consumer’s rights), the Firm’s demand letter violated the Act and the plaintiffs’ FDCPA claims survived dismissal.

Notes: The case provides some much-needed guidance on the contents of a proper demand letter under the FDCPA in a delinquent condo assessment case.  In my practice, I always recommend that my association (or landlord) clients serve the 30-day (or 5-day) notice.  That way, the unit owner or tenant can’t claim a FDCPA violation since the landlord likely won’t qualify as a “debt collector” under the FDCPA (i.e. the landlord’s main business is renting properties; not collecting debts).